Steve Koenemann

A Beer Industry Checkup

It has been a while since I took a more than cursory glance at the beer industry as a whole. What with the economy raising cane in most parts of the world for the last 24 months or so, I was a little afraid of what I might find. Even with some signs of a weak economic recovery beginning here in the US and a few other parts of the world, there are many significant business and personal tragedies left over from the economic devastation that reigned for the better part of 2009 and into most of 2010. For many, the last couple of years have left them financially scarred… a moderate to severe reduction in the value of their retirement nest egg and their real estate investments. The fortunate ones have something of value left to still call their own; the less fortunate are left to try to restructure and restore their personal, business and economic lives. These economic heartaches have forced not only a change in how people are living now, but most likely in how they will need to choose to live in the future. I work in the financial industry and talk there is of a protracted economic recovery, perhaps with many ups and downs over the next couple of years (or perhaps longer), and a somewhat rapid transition to something that is being called the “new normal”. For the average consumer that “new normal” probably means a much more conservative approach to purchasing and ownership of “things” as well as a refocus on saving; both in hopes of producing a more financially secure future for themselves and their family.

The potential change in spending patterns that all of this economic turmoil might bring could, potentially, have a devastating effect (gasp) on both the purchase and consumption of beer. Fearing the worst and hoping for the best I dove into the depths of my favorite Internet search engine for a look around. In spite of my gloomy outlook as I began this survey, what I actually discovered during this examination was quite an interesting mix of good and bad as well as some ups and downs… not nearly as bad as I feared… for some.

My first look was at the “macro” level. What are the broad indicators that might point to both the current state of the industry as well as foretell its near future? As many have already reported, a recent Gallup Poll shows that the US Drinking Rate is at a 25-year high of 67% (versus non-drinkers). As you can see from the chart below, the all-time high percentage was back in the 1970s. Without being too scientific about it (please), you might also notice that in many instances the period of time following some of the recent economic recessions (’60, ’70, ’75, ’91, ’01, ’09) are also times that the drinking rate either began to increase or was already increasing. Is it possible that the feeling of economic recovery feeds the need to drink or is it that we drink to forget the latest brush with economic disaster?

Whatever the reason for the recent rise in the US drinking rate, shouldn’t this be good news for the beer industry? A closer examination of this trend in drinking levels, however, only produces a sparkle for some, but not all, of the beer industry. During the height of the recession, in 2009, total beer sales revenue worldwide was down 2.7% (2.2% in the US) and world beer shipment volumes were down nearly 2.1% for the year… that trend continued into early 2010. The major beer producing conglomerates took this downturn the hardest. The shares of British-owned SABMiller hit their lowest level in more than 5 years in March of 2009… shares of Belgium’s Anheuser-Busch InBev hit their 5-year low in July of the same year. Definitely one of the darkest financial times recently for these mega-brewers.

As the recession has begun its slow retreat, however, the stocks of both these mega-corporations have slowly recovered to nearly their pre-recession levels; although sales of some of their products still mostly lag behind their pre-recession (2008) levels. Anheuser-Busch, the world’s largest brewer, recently reported a Q2/10 rise in profits of 7.5%… a combination of a 2% rise in beer sales and 5.5% rise in soft drink sales. This translated into a 4.1% rise in profits to US$9.1MM. This most recent growth spurt was fueled by their sponsorship of the football (soccer) World Cup and heavy marketing of their flagship Budweiser beer.

In a twist of fate becoming all too common in today’s world of brewer evolution, consolidation and change, MillerCoors has announced a new name for their craft beer and import division… called the “Tenth and Blake Beer Company”. The name apparently comes from their Milwaukee brewery where Leinenkugel is brewed and the Denver brewery where Blue Moon is made. It is becoming increasingly common for these large corporations to attempt to tap into the raging success of the much smaller craft brewing industry through copycat practices (brewing styles and marketing) and outright purchase of established micro-breweries.

As I mentioned earlier, the worst of this recession was not bad (was very good, actually) for some portions of the beer industry. The craft brewing industry, for example, continued to show strong “legs” throughout this time period. As a matter of fact the Brewer’s Association reports that the craft portion of the industry grew 7.2% by volume and 10.3% by dollars during 2009. This compares to growth rates of 5.9% and 10.1% in 2008. This steady growth rate has apparently continued into 2010 with the projected volume growth at about 9% and the dollar growth at about 10%. That kind of year over year growth in both categories wouldn’t be considered too shabby by anyone at any time; recession or not.

The Asian beer market has also showed surprising strength recently. It has even surpassed the European beer market, formally the world’s largest, both in production and in total annual consumption. Buoyed by a quicker than average economic rebound from the latest recession, the Asian beer market increased by 5.5% in 2009 to 5.6MM kiloliters (15.48MM US Gallons or about 491,000 US Barrels). The European beer market dropped by 5.1% in 2009 to 55.1MM kiloliters (14.56MM US Gallons or 462,000 US Barrels). Asian beer production was lead by increases in Vietnam, India and China. This relatively large Asian increase is made even more significant by the fact that the Asian per capita annual beer consumption is far less than the per capita European beer consumption… leaving us with the assumption that there is greater room for growth in the Asian regions than in the European econosphere.

Recessions can also be a time of transition… of both businesses and people… for better and for worse. The recent past is full of such things… here are but a few:

• International Brewers United (IBU) Sold to North American Breweries (NAB) – This recent transition has had the most effect on me personally. Having spent all of my adult life in Vermont, where IBU’s principle entity (Magic Hat Brewery) is both a social and economic icon. I had earlier written an overview of a visit (The Magic Hat Experience) that I had made to Magic Hat and they had also been included in an article called Socially Responsible Brewing for their significant contribution to the Vermont community over the years. I have to admit that the last several years Magic Hat seems to have lost both some of its uniqueness in the beer marketplace and their “craft beer way”, in favor of the larger market of mediocrity. Magic Hat has produced some really great beers over the years (HiPA, Blind Faith, Ravelle, Thumbsucker) and many of them have been “retired” in favor of the production of beer more suited to “Mr Average Beer Drinker”, rather than the true beer aficionado that gave them their early meteoric rise in popularity. I sincerely hope that NAB chooses to reinforce the brand of the “former” Magic Hat and not the one that it has been recently.

• Anchor Brewing Sold – Earlier this year it was reported that the “original” micro-brewery was being sold. Anchor Brewing, the mother-lode of all current micro-breweries was sold to a group of investors from San Francisco. The new investors plan to expand both the brewing and distilled spirit (Skyy Vodka) businesses. It is my belief that Fritz Maytag, the father of the modern microbrew movement, reached a time in his life (retirement?) where is was time for him to move on (I had similar feelings about Alan Newman, the founder of Magic Hat). In a rather unique convergence of my varying tastes, I recently learned that there is weak association between Fritz and the makers of Maytag Blue Cheese. Hmmm… Maytag Blue and Anchor Old Foghorn… Yum! Thanks Fritz!

• Victory Brewing Co. Increases Capacity, Again – Victory Brewing recently added eight 440-barrel fermentation tanks to its expanded production floor. This effectively increases their capacity by 33%. These new fermentation tanks join four other tanks added to the brewery only about 10 months ago. This most recent expansion will push Victory’s beer production to over 100,000 US Barrels (3.15MM US Gallons) per year. Can you say GROWTH!

In addition to the strong economic signals from many parts of the brewing industry, I also believe that there are strong signs of a healthy microbrewer “farm system”… the homebrewers of the world. I was recently invited to attend the The New Hampshire Homebrewer’s Jamboree held annually in early September. While I have never attended this particular event, now in its 14th year, the consistent number of participating homebrewers… at least 6 clubs and 120+ contest entries this year… in this event from year to year gives me great hope for the future of New England’s brewing marketplace. I am truly looking forward to sampling all of the creations of these beer artisans in September.

When I began this examination, I was truly afraid that I would find that the beer industry had matched the economic devastation of so many other industries over the last several years. What I found, instead, was an industry with few real lasting economic scars. There are, without question, many breweries, brewpubs and bars struggling to make ends meet in the shadow of the emerging “new normal”. Some of this fallout of the weak and poorly run or ill conceived is a perfectly normal part of the natural selection process that all industries are constantly undergoing… recessions just make those changes happen faster and perhaps be more dramatic and visible to us. I still have a very positive outlook for our industry… particularly the craft beer movement. You can be absolutely certain, even as I take stock of the necessary changes in my life to produce my own “new normal”, that craft beer will continue its very strong influence in my future. Cheers to all of you! Now go have a beer!

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